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UK FRC consults on the implementation of the Sharman Panel recommendations

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31 Jan 2013

In June 2012, the United Kingdom Sharman Panel of Inquiry, established at the invitation of the UK Financial Reporting Council (FRC) to consider going concern and liquidity risks, published its final report and recommendations. The FRC has now issued for consultation guidance for directors, and related standards for auditors, to implement the recommendations.

The Panel was commissioned in March 2011 to identify lessons from the financial crisis and recessionary environment for companies and auditors regarding going concern and liquidity risks and to recommend measures necessary to improve the existing reporting regime and related guidance in relation to these matters.

The report published in June 2012 called for "a common international understanding of the purposes of the going concern assessment and financial statement disclosures about going concern, and of the related thresholds and descriptions of a going concern" as the inquiry had raised questions about the quality of information provided on companies’ financial health and their ability to withstand economic and financial stresses in the short, medium and longer term.

The FRC has concluded that to improve the robustness and reporting of the going concern assessment, the boards of companies should:

  • consider the threats to the company’s business model and capital adequacy, over a period longer than twelve months, looking through the economic cycle and the company’s own business cycle;
  • develop a high level of confidence that solvency and liquidity risks can be managed effectively during the period of at least twelve months from approval of the financial statements;
  • always disclose the significant risks to the company’s solvency and liquidity and how they are being managed, as part of its discussion of principal risks in the business review; and
  • confirm that it has undertaken a robust going concern assessment.

In addition, the FRC recommends that auditors should consider the board’s report on the robustness of its assessment and the resulting disclosures in the annual report and confirm in their report that they have nothing to add or to draw attention to.

Disclosure requirements about an assessment of going concern are a topic of much international debate and are currently also discussed by the IFRS Interpretations Committee.

The consultation paper is available on the FRC website. The closing date is 28 April 2013.

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